Luxury Car Crash : Sales of Top European Brands Hurt by Recession, Japanese
The reduction of 20,000 jobs announced by Mercedes-Benz this week is part of a continuing shakeout in the luxury end of the European car industry--a global coming-to-terms influenced by the recession in the all-important U.S. market and the success of high-end Japanese vehicles.
In Europe, luxury cars mostly mean German cars; from Rolls-Royce to Ferrari, the rest of Europe’s luxury car industry has all but disappeared. And because Germany’s economy faces a painful combination of recession and inflation in the wake of unification with the former East Germany, the country’s entire car industry is facing an uncertain future.
“You’ll see more of what you’ve just seen at Mercedes,” said John Lawson, an auto industry analyst with Nomura Research Institute in London. “The competitive situation is a challenge that the industry will meet, but the solution won’t be very popular.”
In the U.S. luxury market--the world’s biggest--Detroit’s share has hovered just above the 50% mark since the mid-1980s. But European makers tumbled to 19% of the market from 32%, roughly trading places with the Japanese. (Luxury cars are those with a suggested retail price of more than $20,000.)
Price is a major reason for the Japan-Europe flip-flop. Starting in the late 1980s, the European manufacturers had a period of rapid price escalation, which began to undermine their luxury sales, industry experts said. When the Japanese entered the market, their brands “looked like a real value,” one analyst said. “Lexus could offer the same kind of product at a much lower price.”
“Japan’s success in luxury cars in the United States has basically come out of the hide of the Europeans,” said Clifford Swenson, an analyst at Jacobs Automotive Inc. of Little Falls, N.J., which closely follows the luxury car market.
The question for Mercedes-Benz and the others is whether they can compete with the Japanese--in the United States now and in Europe later this decade, when Japan’s auto makers try to take on the market there.
“Mercedes-Benz’s problems are the same being faced by all European manufacturers operating in the United States: the high number of new products from Japan that are essentially undercutting the Europeans in price while providing comparable quality and sophistication,” Swenson said. “They’ve been relying on mystique to carry the ball for them. They misread the mentality of the American consumer.”
Mercedes announced plans Tuesday to trim 20,000 workers over the next three years from its German work force of 185,000. It employs an additional 53,000 workers outside Germany. The luxury car maker said it hoped to achieve the reduction through attrition, early retirement and failure to extend some temporary jobs. Layoffs, it said, should not be necessary.
Mercedes’ chairman, Werner Niefer, said such savings were “urgently necessary if we are to remain competitive, most notably with the Japanese.”
Germany now benefits from an agreement by the Japanese to restrain sales to the 12 European Community nations. That agreement, which limited the Japanese share of Germany’s car market to 15% last year (compared to two or three times that share in most non-EC countries of Western Europe), is scheduled to end after 1999.
Even as Mercedes announced its planned work-force reduction, it is putting final touches on its third German auto plant, in Rastatt. That plant, due to be completed at the end of May, incorporates the latest in technological efficiencies and, company spokesmen said, will produce more cars with fewer workers than Mercedes’ other two facilities.
Mercedes sold 560,000 cars worldwide last year, down 5,000 from the previous year, a decline that the company attributes mostly to the recession-softened U.S. market. It expects to sell another 560,000 this year.
The company has not yet announced its 1991 profits, but company spokesmen in Stuttgart said they expect the figure to be in line with the previous year’s $900 million. That’s much better than General Motors’ $4.5 billion loss in 1991 but reflects a profit margin of roughly 2% on sales of $40 billion.
BMW--Germany’s and Europe’s other high-volume luxury car maker--sold about 50,000 of its top-of-the-line sedans and coupes last year, an increase of 5,000 over 1990. It expects continued growth this year. Yet BMW is also scaling back its work force to hold costs down. A spokesman in Munich said the company planned to trim 3,000 jobs this year through attrition.
By contrast, Porsche, Germany’s luxury sports car maker, is suffering. Sales plunged by 25% from the first six months of 1991 to the second six months, from 14,078 to 10,562. Sales rose in Germany but fell precipitously elsewhere, by 54% in the United States.
“In the next year or two, we don’t expect the luxury car market to be as good as it was four or five years ago,” a Porsche spokesman said. “But we work to be profitable even under today’s conditions.”
For the fiscal year ending in July, Porsche plans to reduce its administrative ranks by 550 employees, through attrition.
Outside of Germany, Europe’s luxury car industry is a pale shadow of what it once was.
The cream of the cream, Britain’s Rolls-Royce and Bentley, sold a scant 1,722 cars worldwide last year, barely half of the 3,333 sold in 1990. This year it expects to do little better. Last year, Rolls-Royce and Bentley slashed its combined work force by more than one-third, from 4,800 to 3,100. “We’d like to think we’ve completed our cutbacks,” a spokesman said.
Company officials blame the U.S. luxury tax for some of their problems. The tax, which took effect in 1991, can add more than $25,000 to the cost of a Rolls in the United States--a substantial sum, even for a car whose base price ranges from $170,000 to nearly $300,000. The U.S. market accounts for about one-third of Rolls-Royce and Bentley sales.
Britain’s Jaguar, owned by Ford, feels the same pressures. Sales in Western Europe alone skidded from 18,000 in 1990 to 12,000 last year, according to Automotive Industry Data, which publishes a newsletter in Britain.
Meanwhile, in Italy, the luxury car maker Ferrari actually had a good year last year. But it sold only 4,460 cars, which is more than its normal level of about 4,000. Unlike most of its competitors, Ferrari has not reduced its work force recently and has no plans to do so. Employment now stands at 1,903.
“We’re having no problem with the domestic or the European market,” a spokesman said, “but we’re having some problems with North America.”
Researcher Isabelle Maelcamp in Brussels contributed to this report. Havemann reported from Brussels, and Woutat reported from Detroit.
Riding in Style
The United States, along with Europe, is among the most important luxury car markets in the world--key enough that BMW is considering opening a manufacturing plant here. Among their other troubles worldwide, European luxury car makers are finding that the Japanese are stealing their market from them. Cars with a manufacturer’s suggested retail price of $20,000 or more are considered luxury vehicles. A look at how the U.S. luxury car market has changed:
1987:
U.S. Big 3: 50.65
Japan: 17.7%
Europe: 31.7%
1991:
U.S. Big 3: 51.5%
Japan: 29.2
Europe: 19.3%
Big 3 includes: Cadillac, Oldsmobile 98, Park Avenue, Toronado. Riviera: Lincoln Mark VIII, Town Car, Continental; Chrysler Fifth Avenue and Imperial.
Europe includes: Mercedes, BMW, Volvo, Saab, Rolls Royce, Jaguar, Ferrari, Porshe
Japan includes: Toyota Cressida; Mazda 929 and RX7; Lexus; Infiniti; Acura (minus Integra); Nissan 300 ZX.
